Italian prosecutors have now detained the former head of the Vatican’s bank after searching his home and former office for suspected criminal behavior. Catholics and followers of the Holy See will be disappointed to learn that the Vatican’s bank appears to be embroiled in yet another financial scandal. After a number of very embarrassing episodes in recent years, the Pope pledged to comply with international standards on illicit finance and clean up the bank’s image. The European Union has an important role to play in helping the Vatican mitigate risk and come into full compliance; the Financial Action Task Force (FATF), set up by the G-7 to combat money laundering and terrorist financing, has a responsibility as well.

The Institute for Works of Religion (IOR), commonly referred to as the Vatican Bank, is a privately held financial institution located inside Vatican City. Founded in 1942, the IOR’s role is to safeguard and administer property intended for works of religion or charity. The bank accepts deposits only from top Church officials and entities, according to Italian legal scholar Settimio Caridi. It is run by a president but overseen by five cardinals who report directly to the Vatican and the Vatican’s secretary of state. Because so little is known about the bank’s daily operations and transactions, it has often been called “the most secret bank in the world.”

The bank’s president, Ettore Gotti Tedeschi, a well-known and well-regarded figure throughout European banking and social circles, was effectively sacked when the board passed a unanimous “no-confidence” vote in late May. Hired in 2009 with the hope that he would clear the IOR’s reputation, he was fired, according to the Vatican announcement, because he failed to fulfill the “primary functions of his office.” Tedeschi echoed this when he told prosecutors that he came to the office only two days a week, spending the vast majority of his time as the head of Spain’s Banco Santander office in Milan.

Tedeschi and the Vatican Bank have recently been investigated on two separate occasions for money laundering. This past March, JP Morgan Chase closed a Vatican account in Milan after the IOR was “unable to respond” to questionable money transfers, according to Italy’s leading financial newspaper, Il Sole 24 Ore. In 2010, Italian authorities seized €23 million ($30 million) from a Vatican account at Italy’s Credito Artigiano Spa, following allegations that IOR violated anti-money-laundering laws. Tedeschi and the bank both denied wrongdoing, and no charges were ever filed. The money was released after IOR promised to pass measures to come into full compliance with the FATF’s international standards on money laundering and terrorism financing.

But it appears that the Vatican’s promise to comply was nothing less than controversial in the Holy See’s inner circle. A book published last week by Italian journalist Gianluigi Nuzzi details intrigue, corruption, power struggles, bribes, money laundering, and a lack of desire to follow the dictates of the FATF—and its European sister organization, MONEYVAL—to fight illicit finance. The “Vatileaks” scandal, as it has come to be known, is based on over 4,000 internal Vatican documents. It has embarrassed the Vatican and cast a cloud over its effort to demonstrate financial transparency and shed its reputation as a tax haven.

In November 2011, MONEYVAL carried out an assessment to determine how well the Vatican has complied with best practices, and to what degree it has implemented controls to curtail abuse of the international financial sector – according to MONEYVAL insiders, these findings will be made public next month. The Vatican had made a request to be put on MONEYVAL’s money-laundering “white list,” a coveted grade in the international financial market. Both Nuzzi’s book and Tedeschi’s removal as head of the bank cast doubt on the Vatican’s ability to achieve this status.

As the international community reviews its options vis-à-vis the Vatican, both the FATF and the MONEYVAL are uniquely placed to pressure the IOR to reform. Both organizations have scores of trained staff members who can assist the Vatican to implement a robust anti-money-laundering regime that would satisfy both the EU and the international community.

It would also be beneficial if the Italian government were to step in, given its close ties with the Vatican. Traditionally, the Ministry of Economy and Finance has designed the policy aspects of Italian money-laundering and terrorism-finance efforts, while the financial intelligence compliance functions fall under the Ufficio Italiano dei Cambi (UIC), in collaboration with the Guardia di Finanza (GdF). Italy has received high marks from the international community for its part in ensuring the safety and soundness of the international financial sector. Italian government agencies would thus seem to be the ideal candidates to lead the Vatican back to the straight and narrow

In today’s interconnected financial world, instituting measures to mitigate abuse of the international financial sector is part of the cost of doing business. Unquestionably, one of the most serious public policy challenges the international community will face in the foreseeable future is how to use every tool in its arsenal to make progress against those who exploit tainted money. While the Vatican answers to a higher calling, the EU, FATF and MONEYVAL should insist that its earthly responsibilities are equally important.

Avi Jorisch, a former U.S. Treasury Department official, is a Senior Fellow for Counterterrorism at the American Foreign Policy Council in Washington, DC.